Bold energy reforms needed in major emerging economies

Overview

Reforming governments across major emerging economies should push forward with policies to address high energy intensity, corrosive energy subsidies, and encourage wider investment. This insight was highlighted in the World Economic Forum’s Global Energy Architecture Performance Index Report 2015, released in collaboration with Accenture.

The annual index, designed to help countries address challenges and identify opportunities across their energy systems, benchmarks the energy architecture of 125 countries based on their ability to provide energy access across three dimensions of the energy triangle – affordability, environmental sustainability, and security and access. This year’s report focuses on energy reforms in major emerging economies, drawing on examples from Brazil, China, Colombia, India, Indonesia, and Nigeria.

Key Findings

The shortlist of top performers, led by Switzerland (1st), Norway (2nd) and France (3rd), demonstrates that there is no single pathway to a more affordable, sustainable and secure energy system—but that a balanced approach to energy policy across the three dimensions of the energy triangle pays off. All top 10 countries are European and/or OECD countries, with the exception of Colombia (9th).

Major global economies tend to perform less well on the index as their transitions take longer to unfold, due to the complexity of their energy systems. Of these economies, a number are examined in the report. The impact of the Energiewende in Germany (19th) clearly highlights the risks and benefits associated with the energy transition. In the United States (37th), the surge in shale gas production is having a profound impact on national competitiveness and climate policy.

Of the major emerging economies, India (95th) needs to address the growing gap between domestic demand and production, to limit further increases in energy import bills in coming years. China (85th) has taken resolute action to tackle air pollution and meet future energy needs, sparking a renewable energy transition, but much more work remains to control emissions and, amid slowing growth, this will be increasingly difficult.

Analysis

Energy Reform in Major Emerging Economies: New Models for Sustained Growth

Reforming state-owned enterprises (SOEs) in major emerging economies, which together account for nearly half of global energy consumption and carbon emissions, will help to create effective regulatory frameworks, investment signals and public engagement necessary to drive the global energy transition, according to the report.

“Energy reforms will typically take years to implement, so strong institutional and regulatory frameworks that transcend shorter political cycles are critical,” said Arthur Hanna, senior managing director, Accenture Strategy, Energy, and a member of the World Economic Forum’s Global Agenda Council on The Future of Oil and Gas. “In the long term, the prize of effective energy reforms in major emerging economies is great, both for the individual nations concerned—and for addressing affordability, sustainability, and security challenges across the global energy system as a whole.”

The report explores three areas for reforming governments to consider based on lessons learned from other emerging economies:

Enacting sound policies in solid institutions: Nations with responsive policy frameworks and governance structures will be better placed to manage change and create competitive energy architectures. Effective reforms will require modernizing and reforming SOEs to increase their effectiveness and ability to adapt to fast-changing conditions.

Signaling market readiness: Effective investment signals are required to attract the levels of capital needed to build more efficient energy systems. This includes rebalancing the risk and reward ratio for investors, and demonstrating visible leadership commitment to reforms. In Colombia, changing incentives for oil and gas investors through amendments to the fiscal regime initiated more than a decade ago have yielded impressive results for its oil and gas sector, including increased flows of foreign direct investment.

Mastering public engagement: The complexity of the energy sector and its central role in the wider economy mean that serious reform will involve negotiation and interplay between numerous interlocking interests. Progress can appear slow-paced, but this should not be a barrier to serious reform. Engagement with stakeholders across the energy value chain will be essential to sustain momentum for reforms. China’s swift response to public pressure on air quality, which included announcing a range of measures at local and national levels, demonstrates how effective the interplay among different parties can be.

Recommendations

Ultimately, there is no universally applicable formula for energy reform and so difficult choices and trade-offs will need to be made at an individual country level in order to advance the energy transition globally.

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